EU Legislators Approve the Electricity Market Reform

On December 14, 2023, the Council and the Parliament reached a provisional agreement on the Commission proposal for a Regulation to improve the Union’s electricity market design (the “EMD Provisional Agreement”), nine months after the Commission presented its proposal.[1]  

Together with the Regulation to improve the EU’s protection against market manipulation in the wholesale energy market (“REMIT”), approved on November 16, 2023,[2] the electricity market design proposal is part of the Commission’s EU electricity market reform package (the “EU Electricity Market Reform”).[3]

During the legislative procedure, two articles of the market design Regulation have been separated from the Regulation and are now part of a stand-alone Directive.  The final legislative package thus consists of one Regulation and one Directive which are part of the electricity market design reform,[4] as well as one Regulation, part of REMIT.[5]

The new package introduces significant changes to the regulatory landscape applicable to the electricity sector in Europe.  The measures introduced by the reform can be grouped into four main categories based on the objectives they pursue, which complement each other.  Some measures of the reform empower Member States to adopt measures to make electricity markets more stable and predictable (1).  A second group of measures are designed to enhance the efficiency of intraday, day-ahead, and forward markets (2).  Other measures aim at incentivizing and facilitating investments in renewable energy and clean flexible technologies (3).  Lastly, a fourth group of measures is inspired by the objective of protecting consumers and businesses in scenarios of energy crisis and market abuse (4).

1. Empowering Member States to adopt measures to make electricity markets more stable and predictable

The EMD Provisional Agreement acknowledges that the high price of gas resulting from the broader geo-political context and the Russian invasion of Ukraine has led to high prices and volatility in electricity markets.[6]  To make electricity markets more stable and predictable, it identifies two key long-term contractual instruments that Member States will be able to use at a national level to pursue their decarbonization objectives. 

Those two instruments – which, according to the EMD Provisional Agreement, “play a complementary role”,[7] are (i) Power Purchase Agreements (“PPAs”) and (ii) two-way Contracts for Difference (“CfDs”) or “equivalent schemes with the same effect.”

PPAs are defined as “contracts under which a natural or legal person agrees to purchase electricity from an electricity producer on a market basis.”[8]  Such long-term contracts are voluntary and based on market-pricing conditions, without regulatory interventions in price-setting.  Because these contracts are currently only active in a selected number of Member States and buyers tend to be limited to large companies, the EMD Provisional Agreement aims at encouraging the use of PPAs.  Under the new framework, Member States will be required to:

Promote the uptake of PPAs, including by removing unjustified barriers and disproportionate or discriminatory procedures or charges, to ensure price predictability and reach the decarbonization national energy and climate objectives.[9]  The Preamble specifies that Member States should “pay particular attention” to cross-border PPAs, in order to allow consumers in Member States which have a limited capacity to access without discrimination power generated in other regions.[10]

Ensure that customers that face entry barriers to the PPA market and are not in financial difficulty can access instruments aimed at reducing the financial risks associated to off-taker payment default such as guarantee schemes at market prices.  These instruments include (i) state-backed guarantee schemes at market prices, (ii) private guarantees, or (iii) facilities pooling demand for PPAs, and have to be compliant with EU law, including State aid provisions.  Guarantee schemes for PPAs backed by Member States have to include provisions allowing to avoid lowering the liquidity in electricity markets,and Member States are not allowed to use them to support the purchase of power generation from fossil fuels.  Member States have the possibility of deciding to limit the guarantee schemes to the purchase of new renewable power generation based on the Member State’s decarbonization policies“including in particular where the market for renewables PPAs is not sufficiently developed.”  Similarly, the schemes supporting electricity renewable sources will have to allow projects which reserve part of the electricity for sale through a renewable PPA or other“market-based arrangements” to participate, unless such participation negatively affects competition in the market.[11]

Make use of evaluation criteria to incentivize bidders to facilitate the access of customers who might face entry barriers to the PPA market  when designing support schemes.  However, such criteria should be designed in a way that fosters fair competition among bidders rather than hindering it. [12]

The Commission will be charged to verify by January 31, 2026, and every two years after that date, whether Member States have achieved sufficient transparency and whether there are still barriers in the PPA market, and will be able to enact “specific guidance.” [13]

Two-way CFDs are defined as contracts “signed between a power generating facility operator and a counterpart, usually a public entity, that provide […] both minimum remuneration protection and a limit to excess remuneration.” [14]  The EU legislators enlarged the scope of the provisions on CfDs during the legislative procedure by adding a reference to “equivalent schemes with the same effects.”[15]  After the proposal will be adopted:

CfDs or equivalent schemes will be mandatory for investments in new electricity generation-facilities from certain sources.  The EMD Provisional Agreement specifies that direct price support schemes for investments in new power-generating facilities for the generation of electricity from (i) wind energy, (ii) solar energy, (iii) geothermal energy, (iv) hydropower without reservoir, and (v) nuclear energy will have to take the form of two-way CfDs or equivalent schemes with the same effects.[16]

CfDs or equivalent schemes will need to respect certain design principles.  In line with the Council’s October 2023 agreement on the electricity market design proposal, CfDs will have to be designed to take into account a list of principles.  These include, for instance, the need to preserve the generating facility’s incentives to operate, to guarantee the long-term economic viability of the facility, and to avoid distortions to competition by determining remuneration amounts through an open, clear, transparent and non-discriminatory competitive bidding process.  The Commission will have to ensure the compatibility of CfDs with the design principles when assessing the compatibility of each scheme under Articles 107 and 108 of the Treaty on the Functioning of the European Union (the “TFEU”). [17]  Thus, for the CfDs notified to the Commission under State aid rules, the Commission’s review will go beyond the existing State aid assessment framework, and will also be based on the new qualitative criteria introduced by the EU Electricity Market Reform.

Revenues arising from two-way CfDs and equivalent schemes will be distributed to final customers, but Member States may also use such revenues to finance the costs of the schemes or investments to reduce final customers’ electricity costs.[18]

The Preamble of the Regulation clarifies that Member States will be free to choose whether to rely on PPAs or CfDs for their energy transitions.  The main difference between these two instruments is that the former rely on private investors, while the latter rely on public entities investing on behalf of consumers. [19]  However, as mentioned, when Member States will opt for public entities investing on behalf of consumers for new power generating facilities, they will have to rely on CfDs or equivalent schemes compliant with the design principles.

2. Enhancing the efficiency of intraday, day-ahead, and forward markets

The market design Regulation proposes a broad range of tools to enhance the efficiency of intraday, day-ahead, and forward markets, which inter alia:

Shorten the intraday cross zonal gate closure time.  Starting from 1 January 2026, the intraday cross zonal gate closure time shall not be more than 30 minutes ahead of real time.  The EMD Provisional Agreement foresees possible derogations, which must be justified by the Transmission System Operators (“TSOs”) and authorized by the national regulatory authorities (“NRAs”). [20]

Set minimum bid sizes.  Nominated electricity market operators (“NEMOs”)[21] will be obliged to provide products for trading in day-ahead and intraday markets which are sufficiently small in size, with minimum bid sizes of 100 kW or less. [22]

Lay down new obligations for TSOs and NEMOs.  TSOs and NEMOswill have to (i) jointly organize the management of the integrated day-ahead and intraday markets; (ii) cooperate to maximize the efficiency and effectiveness of Union electricity day-ahead and intraday trading; (iii) organize day-ahead and intraday markets to ensure the sharing of liquidity between all NEMOs, at all times, both for cross-zonal and for intra-zonal trade.[23]

Require the Commission to conduct an impact assessment to identify measures to improve the ability of market participants to hedge price risks in the internal electricity market.  The EMD Provisional Agreement establishes that the Commission has to assess the impact of possible measures to improve the ability of market participants to hedge price risks in the internal electricity market, within 18 months from the entry into force of the Regulation and after having consulted the relevant stakeholders.  The text specifies the possible changes that should be covered by the Commission’s impact assessment.  Those include “the possible introduction of regional virtual hubs for the forward market”.  The Commission will then have to adopt an implementing act within 24 months from the entry into force of the Regulation to detail the specific measures and tools to improve the ability of market participants to hedge price risks.[24]

3. Incentivizing and facilitating investments in renewable energy and clean flexible technologies

While all provisions of the Regulation are aligned with the objectives of decarbonisation and energy transition, certain rules specifically aim at facilitating and incentivizing investments in renewable energy and clean flexible technologies by introducing new tools.  To pursue this aim, the Regulation inter alia:

Allows Member States to apply capacity mechanisms.  Member States will have the power to apply non-fossil flexibility support schemes “consisting of payments for the available capacity of non-fossil flexibility”, provided that investments in non-fossil flexibility are insufficient to achieve the indicative national objective that Member States will have to identify. [25]  Like CfDs, non-fossil flexibility support schemes will have to be compatible with a series of design principles aimed at ensuring proportionality and transparency without distorting competition. [26]

Enables the design of peak shaving products.  Peak shaving products allow market participants to reduce electricity consumption at peak hours at the request of the system operator.  The Preamble clarifies that such products are meant to “ensure the efficient integration of electricity generated from variable renewable energy sources” and “reduce the need for fossil-fuel based electricity generation in situations of electricity price crisis.” [27]  Such products can only be activated when an electricity price crisis is declared, and must be approved by the concerned national regulatory authority. [28]

Mandates NRAs to adopt reports on the estimated needs for flexibility.  NRAs will have to adopt a report on the estimated needs for flexibility at a national level.[29]

4. Protecting consumers and businesses from energy crises and market abuses

The last group of rules and obligations aims at protecting consumers and companies from situations of volatility and high electricity prices.  To fulfill this objective, the package:

Empowers the Council to declare a regional or Union-wide electricity price crisis.  The Council, on a proposal from the Commission, has the power to declare electricity price crisis, in case of (i) “very high average prices in wholesale electricity markets of at least two and a half times the average price during the previous 5 years, and at least 180 EUR/MWh”, which must be expected to continue for at least 6 months”, and (ii) “sharp increases in electricity retail prices in the range of 70%”, which must be expected to continue for at least 3 months.  In such scenarios, when the Council declares an electricity price crisis, Member States may “exceptionally and temporarily” set a price for the supply of electricity which is below cost.  In such situations, Member States must ensure that (i) the price set for households only applies to at most 80% of median household consumption and retains an incentive for demand reduction; (ii) there is no discrimination between suppliers; (iii) suppliers are compensated for supplying below cost in a transparent and non-discriminatory manner; (iv) all suppliers are eligible to provide offers for the price for the supply of electricity which is below cost on the same basis; and (v) measures proposed do not distort the internal electricity market.

Provides for various other forms of protection for consumer and final customers, including provisions on contracts with final customers,[30] energy sharing,[31] and protection from disconnections.[32]

Strengthens the framework to address market manipulation and abuse.  Complementary to the rest of the electricity market reform, the REMIT Regulation[33] toughens the current regulatory framework applicable to market manipulation and abuse by: (i) introducing a series of new obligations, such as the duty of market participants from third countries to register with the NRA in the Member State in which they are established or resident[34]; (ii) increasing the inspection tools of the EU Agency for the Cooperation of Energy Regulators (“ACER”), which can now conduct inspections, take statements, and issue requests for information in cases with a cross-border dimension; [35] and (iii) empowering ACER to impose periodic penalty payments, in order to compel persons subject to an investigation to submit to on-site inspections or supply the information requested by ACER. [36]

Conclusion

The Electricity Market Reform introduces a range of measures and regulatory tools to facilitate the EU Member States’ energy transitions.  While businesses will be able to rely on State economic support through CfDs, guarantee schemes and other flexibility support, they must remain compliant with EU State aid rules.  Considering the State aid compliance is coupled with the fulfillment of new qualitative criteria, such as the design principles for CfDs, it is crucial for energy companies operating across the EU to fully understand the implications of the new electricity package.  Now, the Council of the EU and the European Parliament will have to formally adopt the Reform, which will then enter into force following its publication on the Official Journal of the European Union.

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Co-authored with Giacomo Chiti

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[1]           See Council of the European Union, Press Release, Reform of electricity market design: Council and Parliament reach deal, December 14, 2023, available at https://www.consilium.europa.eu/en/press/press-releases/2023/12/14/reform-of-electricity-market-design-council-and-parliament-reach-deal/. The text of the EMD Provisional Agreement  is available https://data.consilium.europa.eu/doc/document/ST-16964-2023-INIT/en/pdf.

[2]           See Council of the European Union, Press Release, Protection against market manipulation in the wholesale energy market: Council and Parliament reach deal, November 16, 2023, available at https://www.consilium.europa.eu/en/press/press-releases/2023/11/16/protection-against-market-manipulation-in-the-wholesale-energy-market-council-and-parliament-reach-deal/.  The text of the provisional agreement reached by the Member States on the REMIT Regulation (the “REMIT Provisional Agreement”) is available at https://data.consilium.europa.eu/doc/document/ST-16636-2023-INIT/en/pdf.

[3]           For an overview of the Commission’s proposal, see SeeCleary Gottlieb EU Energy Resource Center, EC Proposed Reform of the EU Electricity Market, May 9, 2023, available at https://www.clearygottlieb.com/news-and-insights/publication-listing/ec-proposed-reform-of-the-eu-electricity-market.

[4]           Proposal for a Regulation of the European Parliament and the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design;  Directive of the European Parliament and the Council amending Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design.

[5]           Proposal for a Regulation of the European Parliament and the Council amending Regulations (EU) No 1227/2011 and (EU) 2019/942 to improve the Union’s protection against market manipulation in the wholesale energy market

[6]           EMD Provisional Agreement, p. 9.

[7]           EMD Provisional Agreement, p. 33.

[8]           EMD Provisional Agreement, p. 44.

[9]           EMD Provisional Agreement, p. 60.

[10]          EMD Provisional Agreement, p. 27.

[11]          EMD Provisional Agreement, p. 61.

[12]          EMD Provisional Agreement, p. 62.

[13]          EMD Provisional Agreement, p. 62.

[14]          EMD Provisional Agreement, p. 44.

[15]          EMD Provisional Agreement, p. 64.

[16]          EMD Provisional Agreement, Ibid., p. 64.

[17]          EMD Provisional Agreement, Ibid., p. 65.  For a more detailed overview, see Cleary Gottlieb EU Energy Resource Center, Reform of the EU Electricity Market: Member States Reach an Agreement on Contracts for Difference, October 23, 2023, available at https://www.clearygottlieb.com/news-and-insights/publication-listing/reform-of-the-eu-electricity-market-member-states-reach-an-agreement-on-contracts-for-difference.

[18]          EMD Provisional Agreement, Ibid., p. 66.

[19]          EMD Provisional Agreement, Ibid., p. 33.

[20]          EMD Provisional Agreement, p. 51.

[21]          NEMOs are defined as “market operator[s] designated by the competent authority to carry out tasks related to single day-ahead or single intraday coupling.”  Article 2(8), Regulation (EU) 2019/943 of the European Parliament and the Council of 5 June 2019 on the internal market for electricity, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0943.

[22]          EMD Provisional Agreement, p. 53.

[23]          EMD Provisional Agreement, p. 46.

[24]          EMD Provisional Agreement, pp. 55 and 56.

[25]          EMD  Provisional Agreement, Ibid., p. 73.

[26]          EMD  Provisional Agreement, Ibid., p. 74.

[27]          EMD Provisional Agreement, Ibid., p. 47.

[28]          EMD Provisional Agreement, Ibid., p. 74.

[29]          EMD Provisional greement, Ibid., p. 67.

[30]          EMD Provisional Agreement, Ibid., p. 111 ff.

[31]          EMD Provisional Agreement, Ibid., p. 112 ff.

[32]          EMD Provisional Agreement, Ibid., p. 119.

[33]          See supra, fn. 2.

[34]          See REMIT Provisional Agreement, Ibid., p. 44 ff.

[35]          See REMIT Provisional Agreement, Ibid., p. 57 ff.

[36]          See REMIT Provisional Agreement, Ibid., p. 64.